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Thoughts

Energy Code Governance Reform

7th Feb, 2023

Ofgem are seeking initial views on energy code reform – this is Gemserv’s response to their consultation.


The concept of reforming the Energy code landscape has been on the horizon for some time.

The most recent history has seen:

  • April 2022 – Ofgem and BEIS published a joint response to the 2021 consultation on energy code reform.
  • July 2022 – The government introduced an Energy Security Bill to parliament setting out the legislation for energy code reform.
  • December 2022 – To prepare for the implementation of the proposed legislative reforms, Ofgem issued a consultation. Their main goal was to seek input from stakeholders to inform policy development on potential code consolidation and the code manager licensing framework. They also sought views on the role of stakeholders in the new code governance framework. As a dual fuel code manager and code administrator since the gas and electricity markets opened, Gemserv is in a good position to provide a unique view on code reform and consolidation.

We are highly supportive of the need for code reform and to, a lesser extent, code consolidation. Greater standardisation and a simpler, more accessible approach will support market participants to engage with and understand their obligations. This is something we have always advocated for.

What are the key challenges code consolidation should solve?

Code complexity and cost have been common complaints by existing market participants, especially from new entrants. We therefore welcome the proposed design principles proposed by Ofgem. These include ease of understanding, adaptability to future market arrangements and facilitation of strategic change.

However, recognising rising living costs on consumers, we would go further. We would propose a fifth principle: to deliver value for money for the current and future market arrangements.

Furthermore, we believe central systems require stronger governance to test value and suitable prioritisation.

Regarding implementation, on the basis of ease and greater efficiency, we support vertical consolidation. This would allow for stronger cross-collaboration, where there is common knowledge and understanding of the different fuel types. There is an opportunity to start early, by removing existing duplications and to find more logical homes for some of the obligations.

An obvious candidate for consolidation would be for the Independent Gas Transporters’ Uniform Network Code (IGT UNC) and Uniform Network Code (UNC) to merge, given that the former already points to the latter in many cases. However, we would recommend some sensitivity to the different requirements of Gas Distribution Networks (GDNs) and IGTs. We also need to recognise the impacts of (and supporting the adoption of) new fuels like Hydrogen on technical and market arrangements.

Which option offers the best solutions?

We support Option 2 for a common contractual framework and governance arrangement. However, it is important to ensure that parties should not be disenfranchised during the implementation. Setting up arrangements can be complicated, with sometimes unforeseen implications. From our experience, we believe it is important to model proposed arrangements to test potential impacts on different parties. This should include how possible incentives may influence market behaviours. We also support one implementation approach across all codes. Having different approaches across different codes is unlikely to be beneficial and will add to complexity for market participants.

On licencing, we would be keen to see greater detail, as that is undoubtedly where the devil will be. Good governance over delivery, clearly evaluated objectives and properly balanced incentives will drive positive behaviours and successful market outcomes. We believe this is irrespective of whether with-profit or not-for-profit models are adopted. While not-for-profit has sometimes been presented as of lower cost to the market, this is unproven.

Our last point is around listening for the right message. In over two decades of supporting regulatory arrangements, ‘market noise’ can be an unwelcome distraction and influence. Regardless of market share or level of impact, stakeholder forums have to be structured and managed so that what benefits the market, and most importantly the consumer, prevails. While that can sometimes take a ‘strong hand’ and ‘careful handling’ to ensure the right decisions are reached, the consequences of simply following the loudest or most insistent voice could be detrimental to the greater good. Full and active participation by all representatives will normally lead to a fair and equitable market.

 


Gemserv’s Consultation Response

To read our full response to Ofgem’s Energy Code Governance Reform consultation please click below.

Authors

Miriam Atkin

Director of Energy

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